Salary Sacrifice & the Medicare Levy Surcharge: Why It Doesn't Work
Salary sacrificing into super won't reduce your MLS income — the ATO adds it back. This guide explains why, with worked examples and what actually works.
In this guide
- 1. The salary sacrifice myth
- 2. How the ATO calculates MLS income
- 3. Worked example: $120,000 salary, $15,000 sacrifice
- 4. Side-by-side at different income levels
- 5. What about salary sacrifice to non-super items?
- 6. Personal deductible super contributions
- 7. What actually reduces or avoids the MLS
- 8. Try it yourself
- 9. Frequently asked questions
The salary sacrifice myth
The logic seems sound on the surface: salary sacrifice reduces your taxable income, so if you sacrifice enough to push your income below the MLS threshold, you shouldn't have to pay the surcharge. This reasoning is why the myth is so persistent — it's how salary sacrifice works for income tax, HELP repayments, and many other purposes.
But the MLS doesn't use taxable income. It uses a separate, broader measure called "income for MLS purposes" — and this measure was specifically designed to prevent salary sacrifice (and similar strategies) from being used to avoid the surcharge.
The short version
When you salary sacrifice $15,000 into super, your taxable income drops by $15,000. But that $15,000 becomes a "reportable super contribution" on your income statement — and the ATO adds it straight back when calculating your MLS income. The two movements cancel out exactly. Your MLS income is unchanged. Your MLS liability is unchanged.
How the ATO calculates MLS income
The ATO uses a specific income test for the Medicare Levy Surcharge. It's broader than taxable income and is designed to capture your true economic income regardless of how you structure your pay.
Income for MLS purposes
Taxable income
+ Reportable fringe benefits (grossed-up)
+ Reportable super contributions (salary sacrifice lands here)
+ Total net investment losses (added back)
= Income for MLS purposes
Source: ATO — Medicare levy surcharge income, thresholds and rates
The critical line is reportable super contributions. This includes any salary sacrifice amounts your employer directs to super on your behalf. Your employer reports these separately on your income statement (formerly payment summary), and the ATO uses them in the MLS income calculation.
The formula ensures that any dollar removed from taxable income via salary sacrifice is added back via reportable super contributions. The net effect on MLS income is always zero.
Worked example: $120,000 salary, $15,000 sacrifice
Sarah earns a $120,000 gross salary and doesn't hold private hospital cover. She considers salary sacrificing $15,000 into super to bring her taxable income below the $101,000 MLS threshold for singles in 2025–26. Here's what actually happens:
Before vs after salary sacrifice
| Component | Without sacrifice | With $15,000 sacrifice |
|---|---|---|
| Gross salary | $120,000 | $120,000 |
| Salary sacrifice to super | $0 | $15,000 |
| Taxable income | $120,000 | $105,000 |
| Reportable super contributions | $0 | +$15,000 |
| Income for MLS purposes | $120,000 | $120,000 |
| MLS tier | Tier 1 (1.0%) | Tier 1 (1.0%) |
| Annual MLS payable | $1,200 | $1,200 |
* Based on 2025–26 MLS thresholds. Single, no private hospital cover, no fringe benefits or investment losses.
What this means in dollars
Sarah salary sacrifices $15,000 hoping to avoid MLS
MLS is still $1,200/year — unchanged
Her taxable income dropped to $105,000, but MLS income stayed at $120,000. The sacrifice saved her income tax (roughly $4,875 at the 32.5% marginal rate) but did nothing for the surcharge.
Sarah's salary sacrifice was still worthwhile for income tax purposes — she'll pay about $4,875 less in income tax (the $15,000 is taxed at 15% inside super instead of her 32.5% marginal rate plus 2% Medicare levy). But if her goal was to avoid the $1,200 MLS bill, she'd need to get qualifying private hospital cover instead.
Try this scenario
See Sarah's exact scenario: $120,000 income, single, no private hospital cover.
Calculate this scenarioSide-by-side at different income levels
The pattern is the same regardless of income or sacrifice amount. Here are several scenarios showing that MLS income — and therefore MLS payable — is always unchanged by salary sacrifice.
Salary sacrifice impact on MLS — singles, 2025–26
| Gross salary | Sacrifice | Taxable income | MLS income | MLS payable |
|---|---|---|---|---|
| $105,000 | $10,000 | $95,000 | $105,000 | $1,050 |
| $120,000 | $15,000 | $105,000 | $120,000 | $1,200 |
| $120,000 | $25,000 | $95,000 | $120,000 | $1,200 |
| $140,000 | $20,000 | $120,000 | $140,000 | $1,750 |
| $170,000 | $30,000 | $140,000 | $170,000 | $2,550 |
* Notice that MLS income always equals the original gross salary. No matter how much you sacrifice, the MLS calculation ignores the restructuring. MLS is calculated on MLS income, not taxable income.
In the second and third rows, the same person earning $120,000 tries sacrificing $15,000 and then $25,000. Even sacrificing $25,000 — pushing taxable income down to $95,000, which is well below the $101,000 threshold — makes no difference. MLS income stays at $120,000 and the surcharge remains $1,200/year.
What about salary sacrifice to non-super items?
Some salary sacrifice arrangements direct money to benefits other than super — for example, a novated car lease, a laptop, additional annual leave, or other fringe benefits. These don't help with MLS either, for the same fundamental reason.
- Novated car lease — the benefit is reported as a reportable fringe benefit (grossed-up value) on your income statement. The ATO adds it back for MLS purposes.
- Laptop or work equipment — same as above. The grossed-up taxable value becomes a reportable fringe benefit.
- Additional leave — if structured as salary sacrifice, the value is captured in reporting. The ATO still sees your full economic income.
The MLS income formula adds back both reportable super contributions and reportable fringe benefits. Whether you sacrifice to super or to non-super benefits, the ATO recaptures the full amount. There is no salary sacrifice arrangement that reduces your income for MLS purposes.
Personal deductible super contributions
Since 2017, anyone under 75 can make personal super contributions and claim a tax deduction (under section 290-150 of the Income Tax Assessment Act 1997). Some people wonder if this alternative to salary sacrifice works differently for MLS. It doesn't.
When you claim a deduction for personal super contributions, your super fund reports these to the ATO. They become part of your reportable super contributions — the same component that gets added back for MLS purposes.
Example: $10,000 personal deductible contribution
| Component | Without contribution | With $10,000 contribution |
|---|---|---|
| Assessable income | $110,000 | $110,000 |
| Tax deduction (super) | $0 | -$10,000 |
| Taxable income | $110,000 | $100,000 |
| Reportable super contributions | $0 | +$10,000 |
| Income for MLS purposes | $110,000 | $110,000 |
* The deduction brings taxable income to $100,000 — below the $101,000 threshold. But MLS income stays at $110,000, firmly in Tier 1. The same add-back applies.
What actually reduces or avoids the MLS
Since salary sacrifice and super contribution strategies don't work, here are the approaches that genuinely reduce or eliminate the Medicare Levy Surcharge:
Get qualifying private hospital cover
The most common and straightforward approach. Basic hospital cover with a $750 excess (singles) or $1,500 (families) from a registered Australian insurer eliminates MLS entirely. For most people above the threshold, the cheapest qualifying policy costs less than the MLS — often significantly less at higher incomes.
Have income for MLS purposes below the threshold
If your total MLS income (including the add-backs) is $101,000 or below for singles, or $202,000 or below for families in 2025–26, you don't pay MLS. But remember — you can't use salary sacrifice, negative gearing, or super contributions to reduce this number. It has to be genuinely lower.
Time your cover strategically
MLS is calculated on a daily basis. If you take out hospital cover partway through the financial year, you only pay MLS for the days you were uninsured. Getting cover as early as possible in the financial year minimises the pro-rated MLS.
Cheapest Hospital Cover to Avoid the MLS
Compare the cheapest qualifying policies against your MLS cost, including PHI rebate and break-even analysis.
Try it yourself
Use the interactive Salary Sacrifice & MLS calculator to enter your own salary and sacrifice amount. It shows exactly how taxable income, reportable super, and MLS income change — and confirms that the MLS stays the same.
Salary Sacrifice & MLS Calculator
Interactive side-by-side comparison — enter your salary and sacrifice amount to see the before/after on MLS income.
Try this scenario
Try $130,000 gross salary with a $20,000 sacrifice into super. Watch MLS income stay at $130,000 regardless.
Open the calculatorFrequently asked questions
Calculate your exact MLS liability
The MLS calculator factors in your income, family status, and whether you hold private hospital cover. It shows your MLS tier, annual surcharge, and how much hospital cover could save you.
Open the MLS Calculator →Salary sacrifice does save you income tax — just not MLS. Try the Salary Sacrifice Calculator to see your actual tax savings.
Related guides
Cheapest Hospital Cover to Avoid the MLS →
Compare the cheapest policies and break-even analysis against your MLS cost.
MLS Thresholds 2025–26 →
Current income tiers for singles and families, with worked examples.
How to Avoid the Medicare Levy Surcharge →
Step-by-step guide to MLS exemption rules and qualifying cover.
← Back to MLS Calculator
Calculate your exact MLS liability and compare it with the cost of cover.